ISS Proposes Preliminary Voting Policy Updates for 2016 Proxy Season

ISS has released its proposed voting policy updates for the 2016 proxy season, which relate to: (1) unilateral board actions, (2) director overboarding, and (3) compensation at externally managed issuers. Copies of the ISS proposals are available here. US issuers should review these proposed updates in anticipation of the 2016 proxy season. Comments to the policies are due by November 9, 2015, and ISS is expected to publish the final policies for the 2016 proxy season on November 18, 2015. Notably, these policy updates do not address proxy access, board responsiveness or other key corporate governance topics.

Unilateral Board Actions

ISS’ first proposal relates to board actions where a company’s board of directors unilaterally adopts or amends bylaws or charters to implement provisions that “diminish shareholder rights or otherwise negatively impact shareholders.” Under its updated policy, ISS generally would issue adverse voting recommendations for director nominees if a board unilaterally amends company bylaws or charter to:

• either classify the board or establish supermajority vote requirements in any period after it completes an IPO; or
• classify the board and establish supermajority vote requirements to amend the bylaws or charter before or in connection with the company’s IPO.

This update is intended to clarify ISS’ position with respect to problematic unilateral amendments to a company’s bylaws and charter, and to address amendments that occur before or in connection with an IPO that diminish shareholder rights or otherwise negatively impact shareholders. The update is also consistent with ISS’ vote recommendations in 2015, during which ISS issued adverse vote recommendations for director nominees in connection with both pre-IPO and post-IPO amendments that classified the board and/or established supermajority voting requirements.

ISS is requesting comments on the following:

• Are there any unilateral board actions other than board classification or implementation of supermajority vote requirements to amend the bylaws or charter that you consider equally problematic in negatively impacting shareholder rights?
• When, before or in connection with an IPO, the board classifies and implements supermajority vote requirements to amend the bylaws or charter, do you consider it appropriate to hold the directors accountable through continuing adverse vote recommendations at annual meetings following the IPO?

Director Overboarding

ISS’ second proposal relates to director overboarding. Under its current policy, ISS may issue an adverse vote recommendation for individual directors who:

• sit on more than six public company boards; or
• are CEOs of public companies and sit on the boards of more than two public companies besides their own (in this case ISS would issue an adverse vote only with respect to outside directorships).

The new proposal seeks to lower the thresholds for the number of permitted directorships by providing that ISS would recommend a vote against or withhold for directors who:

• are CEOs of public companies and sit on the board of more than one public company other than their own (ISS would continue to issue an adverse vote only with respect to the outside directorship); or
• are not CEOs of public companies and sit on the boards of more than either:
  • five public companies (the board under consideration plus four others); or
  • four public companies (the board under consideration plus three others).

ISS would also provide for a one-year grace period until 2017 to facilitate the transition. During the grace period, ISS would include cautionary language in its research reports but would not issue a negative vote recommendation for overboarded directors under the revised policy.

ISS is requesting comments on the following:

• Do you consider that lowering the limit for CEOs to be considered overboarded as proposed is appropriate? If not, please explain.
• Do you consider that lowering the limit for non-CEOs to be considered overboarded as proposed is appropriate? If so, would you favor a limit of either five total directorships or four total directorships? If not, please explain.

Compensation at Externally Managed Issuers

ISS’ third proposal relates to compensation at externally managed issuers (EMIs). ISS has expressed concern with the lack of transparency in EMI compensation disclosures. ISS proposes to update its pay-for-performance policy to indicate that ISS generally would recommend a vote against any “say-on-pay proposal (or compensation committee members, the compensation committee chair or the entire board, as appropriate, in the absence of a say-on-pay proposal on ballot)” if ISS determines that a “comprehensive pay analysis is impossible” due to “insufficient disclosure” regarding executive compensation by an EMI.

ISS notes that this update is due to the unique compensation structure of EMIs as “an EMI typically does not directly compensate its executives,” but rather provides executive compensation through an external manager who is in return reimbursed by the EMI through a management fee. In addition, ISS notes that the details of such compensation arrangements generally are not disclosed in “sufficient detail” and make it “impossible for shareholders to assess pay programs and their linkage to company performance.”

ISS is requesting comments on the following:

• Does your organization agree that an “against” vote recommendation for an externally managed company’s say-on-pay proposal is appropriate when the company does not provide sufficient disclosure on executives’ compensation arrangements with the external manager? Please explain your answer.
• What factors should ISS consider in gauging potential conflicts of interest underpinning executives’ compensation arrangements with the external manager?
• Do you see any unintended consequences that may result from the proposed policy update?

Comments Sought by ISS

Comments on all three proposals may be submitted via email to policy@issgovernance.com until 6 p.m. EST on November 9, 2015. All comments received by ISS will be published, unless otherwise requested. Final policies are expected to be released on November 18, 2015 and will apply to shareholder meetings taking place on or after February 1, 2016.